Can Xbox360 Boost ATI's Fortunes?

Commentary: Success may be in the (graphics) cards

BERKELEY, Calif. (MarketWatch) -- When the original Xbox was released by Microsoft it changed the balance of power in the industry by injecting a lot of money and introducing new ideas to the game console business.

Microsoft
MSFT, +1.25%
is not letting up, and its newest Xbox360, to be released for sale at the end of November, promises to keep pressure on the game console business.

The first iteration of the Xbox had impact on one supplier in particular. It's most adverse effect was on the Sega company which, under pressure, ended its game console business altogether. And the big winner in the deal was nVidia
NVDA, -2.49%
which was the maker of the graphics controller within the Xbox. Its stock soared and has continued to do well.

Are there any potential side bets this time around with the Xbox360? A lot will depend on ironing out some early glitches. It's already gotten off to a rocky start as its wireless components seem to interfere with in-store wireless networks. This was witnessed by a recent problem at the Wal-Mart chain where the system was going to be previewed. That should be resolved quickly.

I have played with and examined the Xbox360 and despite the foul-up at Wal-Mart there is no doubt that this machine will be a blockbuster success. That means millions of units will be sold. Wedbush Morgan Securities in a recent report predicts 2.5 million units sold in the U.S. and Europe alone.

The supplier names that crop up in conjunction with the Xbox are IBM
IBM, +0.10%
maker of the microprocessor used by the device; Chartered Semiconductor
CHRT, -0.24%
the second source for the chips; Flextronics
FLEX, -0.27%
Wistron [3231.TW] and Celestica
CLS, +0.25%
as contract box manufacturers; and ATI Technologies
ATYT
as the graphics chip designer/manufacturer.

NVidia has gone over to the Sony Playstation as its graphics controller maker after some disputes with Microsoft during its work on the original Xbox.

If the biggest beneficiary of the first Xbox success was nVidia, would this mean ATI is the company to watch? That would be my best guess. And since Flextronics has recently been slammed by the street, it might also make an interesting turnaround working with Microsoft. All the companies mentioned would be worth following, but ATI has the most to gain.

Here's what actually happens to boost the fortunes of a company such as ATI or nVidia when they develop controllers for an advanced game console like this. They are afforded the luxury to push the envelope of the technology with a lot of expensive R&D to incorporate newer ideas into these cards to make the displays faster and more realistic. This immediately falls over into the bigger more profitable PC markets, especially amongst PC gamers and their hot machines.

NVidia, for example, is still benefiting from its relationship with Microsoft as it leads the industry with very advanced graphics controllers including the newest SLI (scanline interleave mode) systems that are the ultimate in desktop computer graphics. The cards cost around $450 each and you need two of them for the ultimate in performance. Everyone wants them.

What will happen with ATI is that certain characteristics of its Xbox360 controller will be admired by the game developers and they will employ code to optimize use of these features. This always spills over to the PC side and suddenly ATI will have a card that specializes in this function or method. The next thing you know everyone has to have that new card. ATI and nVidia have been fighting with each other in this incredibly competitive market for years now and the results have been remarkable products for end-users and profits for the companies.

ATI has been lagging behind nVidia with nothing solid to compete with the remarkable nVidia SLI cards. If the Xbox is a massive success, as I predict it will become, then ATI could be the main beneficiary.

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